"Leadership is a matter of having people look at you and gain confidence, seeing how you react. If you're in control, they're in control."

-- Tom Landry

The S&P 500 and Dow Jones Industrial Average finally broke out to new highs on Friday, but it wasn't the sort of big-volume action that portends further upside. Although technically the Dow and S&P look quite healthy, the nature of the market leadership is cause for concern. The Nasdaq Composite has been lagging badly and the Russell 2000 is not as strong as the two senior indices.

The strongest stocks in the market recently have been oil-related issues. Oil is not good market leadership because the only business that benefits from higher oil is oil. And rising oil prices are nothing more than a tax on business.

We have also had some strong action in homebuilders, steel, mining of various sorts, commodities and cyclicals. This is better leadership, but strength in these groups, especially steel and commodities, do not benefit other sectors of the economy. Strength in homebuilders may be a function of individuals feeling more comfortable holding real estate than financial assets, which is not a good thing for equities.

The nature of the market leadership is not particularly healthy now, and even worse, most of the stocks in the leading groups, particularly oil and homebuilders, are very technically extended. Even if you want to play those stocks, it is extremely difficult to find attractive entry points.

The best leadership for the market tends to be technology, financials, retailers and biotechnology. These are groups that reflect economic action that benefits the broader economy, unlike strength in oil and commodities, which raises the costs of doing business.

The bulls argue that strength in oil and commodities is due to increased economic activity and more demand. That may be true to some extent, but a big part of the strength is due to manipulation of supply, and speculative trading action. Industry demand is questionable, especially if slowing in China continues, as many predict.

The best scenario for the bulls continues to be a rotation into new leadership. If money moves out of oils, commodities, homebuilders and steel, and into retailers, technology and financials, then the Nasdaq would begin to outperform. Rotation into those groups and outperformance in the Nasdaq would be ideal bullish action. A pullback in crude oil would be ideal for the market at this point.

Oil and leadership are the themes we have to watch this week. If a rotation takes hold, we will have some real fireworks, but if oil continues to elevate, it is going to take a toll on many other sectors of the market. We need to be vigilant in gauging the themes at work in this market.

Oil is trading lower this morning, which is pressuring the senior indices but helping the Nasdaq a bit. Overall it looks like a quiet start and market participants try to figure out the forces at work.